Environmental, social and governance (ESG) factors were considered the primary driver in 13% of AM Best’s global rating actions during the 12-month period ending in March 2021, according to a new report from ICMIF Supporting Member AM Best.

The Best’s Special Report, Impact of ESG Factors on AM Best’s Rating Actions, notes that nearly three quarters (72%) of the ESG-driven rating actions were on companies domiciled in the United States, while 15% were on companies in Europe and 13% in Asia-Pacific. Property/casualty companies accounted for predominately 85% of the rating actions driven primarily by ESG factors.

Recent regulatory requirements on credit rating agencies (CRAs) issued by the European Securities and Markets Authority (ESMA) mandate that CRAs publicly disclose information relating to ESG factors that are key to the determination of a rating action. For those ESG-related rating actions taken between April 2020 and March 2021, 69% were negative while 31% were positive.

Weather-related events and governance were the primary ESG factors driving these actions. The vast majority of rating actions related to weather were due to events for which exposures fell outside of AM Best’s, as well as the company’s, expectations. “This was particularly true for small monoline insurers with geographic concentration, such as companies exposed to floods or wildfire risk in a single U.S. state,” said Victor Bhagat, associate director, Credit Rating Criteria Research. “Failure to manage catastrophe risk may also be a consequence of weak governance.”

AM Best has identified core ESG factors that were the primary drivers of rating actions during this period. They are:

• Natural catastrophe or weather-related events (including the stress testing capabilities and non-modelled risks)
• Other environmental risks (including transitional and liability risks);
• Reputational risks stemming from environmental, social, or governance factors; and
• Governance

These factors can affect any or a combination of the four building blocks in Best’s Credit Rating Methodology (BCRM): balance sheet strength, operating performance, business profile, and enterprise risk management (ERM).

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=310644